CPI Aerostructures, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. The company manufactures structural aircraft parts and assemblies for commercial and defense markets, and provides engineering, program management, supply-chain management and MRO services.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $18.19 million | $20.03 million | Down 9.2% |
| Gross profit / margin | $4.05 million / 22.3% | $4.54 million / 22.6% | Profit down $0.49 million |
| Operating income / margin | $2.00 million / 11.0% | $2.37 million / 11.8% | Down $0.37 million |
| Net income | $1.26 million | $1.25 million | Up slightly |
| Diluted earnings per share | $0.14 | $0.14 | Unchanged |
| Operating cash flow | $(2.57) million | $(2.89) million | Cash used in both periods |
Revenue declined primarily due to a normal cyclical reduction in domestic and foreign E-2D program sales. Government subcontract revenue fell 34.9% to $8.14 million; direct military revenue rose to $2.58 million, primarily on T-38 kits; commercial subcontract revenue increased 1.2% to $7.48 million. Gross profit declined mainly with lower volume. Net income was slightly higher despite lower operating income, helped by a lower tax provision.
Balance sheet, liquidity and cash flow
- Cash was $0.28 million at March 31, 2018, down from $1.43 million at year-end. Working capital was $79.61 million, up 1.9% from December 31, 2017.
- Current assets were $120.65 million and current liabilities $41.05 million. Contract assets were $114.02 million, up $2.87 million during the quarter; the filing notes that reported earnings may not convert promptly to cash.
- Total debt, including the revolving line and long-term debt, was approximately $33.48 million, compared with $31.89 million at year-end. Revolver borrowings were $24.84 million at 4.94%; the $30 million revolving facility is secured by company assets. The company reported compliance with financial covenants.
- Operating cash use reflected increases in contract assets and reductions in accounts payable and accrued expenses, partly offset by collections of receivables. Financing activities included $2.0 million of additional line-of-credit borrowings.
- Management said available resources and credit-facility capacity were expected to meet working-capital needs for at least 12 months from the filing date.
Backlog, outlook and notable developments
- Total backlog was $373.25 million at March 31, 2018, down from $388.73 million at December 31, 2017; $56.80 million was funded. Approximately 78% was attributable to government contracts. The company cautioned that substantially all backlog may be terminated or rescheduled, and unfunded backlog depends on future appropriations or orders.
- Remaining performance obligations were $62.08 million; management estimated that approximately 64% would be recognized as revenue in 2018 and 36% in 2019. This estimate is not a full-year revenue forecast.
- Q1 contract-estimate revisions reduced expected gross profit by approximately $0.32 million, versus a $1.28 million reduction in Q1 2017. A roughly $0.24 million unfavorable adjustment reflected revised estimates on a long-term program where the company was seeking contract extensions and expected a lower selling price; another $0.13 million reflected excess overhead and material costs.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and reported no material impact on Q1 results. Revenue on most contracts is recognized over time using a cost-to-cost measure, which depends on estimates of total contract costs and revenues.
- The Q1 2018 effective tax rate was 19%, versus 37% in Q1 2017, reflecting U.S. tax reform, including the lower federal corporate rate and the revaluation of deferred taxes. The company described the tax-reform impact as provisional and subject to revision.
- On March 21, 2018, the company agreed to acquire Welding Metallurgy, Inc. for $9.0 million in cash, subject to working-capital adjustment, plus up to $1.0 million in contingent payments. Closing was expected in Q2 2018. An April 24 lender commitment letter contemplated extending existing loan maturities to May 31, 2021 and providing a new term loan for the acquisition; definitive amendments remained subject to due diligence and documentation.
Risks and investor verification
- Contract accounting relies on cost and margin estimates; revisions, termination, delays or cost overruns can reduce later-period revenue or profit. Up-front program costs may be impaired if programs are delayed or cancelled.
- Liquidity is sensitive to the timing of billing and collection: cash was low while contract assets were substantial, and Q1 operating cash flow remained negative. Management acknowledged possible borrowing or other funding needs if cash receipts lag reported earnings.
- Customer and program concentration is notable. Four largest commercial customers represented 66% of Q1 revenue; concentration in contract assets was also significant. The filing identifies E-2D program cyclicality and G650 shipping delays as contributors to period activity.
- Verify the completion and financing of the WMI acquisition, including final facility amendments; progress in converting contract assets and backlog into billings and cash; and whether contract estimate revisions or program delays affect margins and liquidity.
- The filing reported no legal proceedings and no material changes to the risk factors disclosed in the 2017 Form 10-K. Management concluded disclosure controls were effective as of March 31, 2018.